Saturday, August 6, 2011

Rethinking the stimulus: Keynesian economics and why it wasn't implemented properly

[Today we feature guest blogger Steven Verner!  We thank him for his contribution and hope to hear more from him!  As always, if you would like to contrubute, email]

Much has been made of the “American Recovery and Reinvestment Act,” also known as the stimulus...its positives, its negatives, economic numbers that say it's working, and numbers that say it is not.

One thing is for certain; it is not living up to the hype.  

The problem for me is that nobody is coming out and explaining why.

We see a lot of conjecture from the liberal side about jobs saved, greater economic ruin averted, and several other positive spins put on it, and, of course, the Republicans talking about how much it cost, how it hasn't helped the way we were told by Obama it would, and how they have this other set of ideas that they want to do.

But no "Why?"

Why has it failed to do what was expected of it?  Was it a bad idea?  Was it ill conceived?  Exactly where did this stuff come from anyway?


Not from the mainstream media; not from the economists; not from the bloggers worldwide; not a word.

In addition, there is no real answer to what we should be doing now, or what we should have been doing to help keep this from happening and lessen its impact if it did.

Certainly, other ideas being called for now are no better.

Cutting government spending in the middle of a recession, as Conservatives have called for,is at least as irresponsible as running up massive government debt.

Every dollar that the government does not spend is a dollar that is not flowing through the economy.

Cutting taxes to the rich in an attempt to induce hiring doesn't fare well either.  Businesses don't hire more people out of the goodness of their hearts or just for the heck of it; they hire because they need more people to fill the demand for the goods and services the company is offering.

Not a lot of demand is created by essentially giving more money to people who already have enough money to buy whatever they want. The American Recovery and Reinvestment Act type of economic stimulus is not a new invention, and certainly not something that the Obama administration pulled out of thin air, nor is it some obscure thing.

It is a sound economic recovery plan that has been used multiple times, mostly...until now..with great success.  As well, we do not stand alone in its use.  Countries as diverse as China, Germany, and the United Kingdom have implemented similar measures in response to this global economic crisis.  

Differences occur only in the precise amounts going to different measures -- like unemployment benefits, infrastructure spending, and tax cuts -- as well as fiscal measures, including lowering interest rates and loans to banks to attempt to open up more lending.

These types of stimulus measures are part of a macroeconomic theory based on the ideas of 20th century English economist John Maynard Keynes. In short, Mr. Keynes posits that the free market is too volatile on its own, so it is the job of government, in the interest of its citizens, to help smooth out the rise and fall of the economy.

The government would achieve this goal by spending more and lowering interest rates when the economy goes down and spending less and raising interest rates when the economy goes up…with the goal being to achieve a relatively steady expansion of the economy and lessen the impacts of huge swings upward creating bubbles and huge swings downward when those bubbles burst.

John Maynard Keynes
There are many books and websites on Keynesian economic thought which give a much more thorough and accurate explanation, but that is the basic "definition" that governments utilize and currently operating under.

Keynesian stimulus of an economy in recession is supposed to work by placing more money into the economy.

If the government repairs a road or builds a new bridge, it puts people to work. Those people then have money to spend, which increases demand for goods and services…demand which must be filled by people producing those goods and offering those services, inevitably requiring more people working to fulfill that demand, which then creates more demand, thus beginning a continuous cycle of demand creating more demand creating more employment.

Which brings us to Keynesian economics’ downfall through globalization…

…if all the goods and services that you buy come from outside of the economy you live, and hopefully work in, the stimulus ends

If the corn that goes into your corn flakes and the strawberries in your fruit smoothie come from somewhere in South America, your Levi jeans are made in Mexico, and your kid's toys come from China, whose job are you supporting?

Certainly not your own or your neighbor's job.

Keynesian economics at its base is "built" for a closed economy.

Certainly, there is a such a thing as "Global" or "International" Keynesianism, but it is, as of yet not, fully realized as an economic theory and would be extremely hard to implement given the various political climates worldwide and the economic aims of individual countries.

Nevertheless, Keynesian economics is "broken" by globalization.

More precisely, it is broken by the particular type of globalization that currently exists in our world…a globalization in which the cost of living and income differences are so vast and the environmental standards and other regulations are so different that some places are chosen over others simply because the cost of doing business there is vastly less.

It's not the fault of your average consumer -- at least not directly -- it is, more directly, the fault of our government and governments of various countries we trade with, which have laws and trade agreements that create certain conditions, and of individual companies that utilize those conditions…all to the detriment of us "average" citizens…both here and abroad.

Companies have actively sought to lower pay and benefits for their workers as well as reduction of their workforce in the interest of the bottom line.

This is not evil or wrong of them.

Every advantage that can be used to increase the profits of their company and get a leg up on their competition should be used. Having a greater profit margin makes for a stronger business, more able to weather temporary setbacks and take on greater levels of expansion in good times, and is a hallmark of our free market economy.

It does create a problem though.

Logically, fewer employees and lower pay for remaining employees, eventually results in fewer and fewer people being able to afford the products those companies make.

In addition, companies are now faced with global competition, which can utilize a workforce that requires a far lower pay rate in order to meet their standard of living, resulting in companies further requiring a workforce and paying reductions until productivity can go no higher and wages no lower.

At such a time, either the company goes bankrupt or moves production outside of the country, utilizing the lower wages present in places like China, Taiwan, and Mexico.

We simply cannot compete with a global workforce whose cost of living is so much lower than ours. And, when what jobs we have and wages we make so quickly go outside of the country, economic stimulus simply will not work.

A major change in direction must take place. We cannot continue in a situation where the people who make our products and offer services we need are increasing in other countries instead of here at home.

There are no simple answers to reversing this course least in the details.

There are some overarching things we can do, though.

In order for our workforce to compete, we must reduce some of the many advantages that the workforce in other countries have over us.

One of those advantages is that their pay and their cost of living is dramatically lower than ours. The workers in other countries often cost less, and they can simply get by with less. In addition, the regulations in place here in this country are simply prohibitive when compared to the regulations present in other countries.

This is not a call for a lowering of our living standard or a call for loosening our regulations.

Our standard of living has been the standard that people around the world have aspired to for generations; our regulations are there to protect both the workers and the consumer. To lower either of them would be a great mistake.

Perhaps there is room to streamline those regulations…to not only make it easier for companies to meet them and make it less costly for both the companies to follow and also for our governmental agencies to enforce them, but to remove those regulations to invite greater levels of injuries to workers and consumers and also greater environmental disasters to ruin our natural resources.

It would be much more preferential to raise the standards in other countries, to create better working conditions and raise wages for workers worldwide.

I understand this would be a hard sell in any political climate and would require huge amounts of work. Existing treaties would have to be renegotiated; rules would have to be put in place regarding what must be included in new ones.  Governments worldwide would have to be pressured to implement regulations concerning worker and environmental safety…the list goes on.

I think it would be worth it.

The resultant increase in demand for products worldwide would be dramatic, less economic turmoil would result in fewer conflicts, and a general equalization of incomes and living conditions would reduce illegal immigration and curb the illegal drug trade…both of which are often born out of poverty.

The possibility of reducing these costs to us and our allies, and even our current enemies, should be enough to consider a move in the direction of worldwide income equalization.


  1. Very well written, Steve. Although I'm not in agreement with it all, I do agree with the relaxing on tough regs and the fact that Keynesian economics won't work over here.

    We literally put people outta business everyday with overbearing regulations (see, CA southern farmers and the fact that the environmentalist destroyed them because of a small fish called the "delta smelt"). The EPA needs a real gut check and needs to be gashed. They are also killing the coal business in Appalachia. It's not even worth it to open mines anymore. Again, we cannot be afraid to use our resources. And believe me, it's not in the best interest for these industries to destroy the environment. Most already follow the most stringent rules out there.

    As far as the Keynesian way, it just won't work. Not here. Not in a free market. Not in a global sense, as you pointed too. And I'm fine with that. And striving for equality on the economic sense, well it just won't ever be that way. We're talking about having to change cultural differences. Other countries don't live the way we do, and that's ok. It's not bad, just different. But like the African countries we've dumped countless dollars into, you can't force it. How has Africa changed in the last 10 years with all the billions we've put into it?

    So while it's a nice thought, I just don't think it's something that can be attained. Mainly because It's a culture issue, not an economic one. We can't have "worldwide global equalization" because most of the countries don't offer anything. How can we have "equality" if all countries aren't equally invested? Should we (as in the productive countries) carry everyone else? That's basically what we're doing now, with no return on investment because those countries simple do not care. Like our class of zero liability voters, there is no incentive to do so. We'll just keep sending money.

    Just some thoughts


  2. Ask Europe how they got to a point where they outperform us on a percapita basis, it's Keynesianism, Socialistic principles, and Equal income distribution across Europe. And you can easily see what happens when a country turns it's back on helping their fellow man, just look at Greece. Greece took adopted Freidman style laissez-Faire economics, the same thing that we moved to starting in the 80s, now look at them. Such a tiny country didn't have as far to fall as we once did, but due to Crony capitalism we are well on our way. And don't give me the crap about free markets, we don't have free markets here, ask any mom and pop grocery store or small shop that has been put out of business by walmart, and then look at all the tax breaks and subsidies Wally world gets and all the slave and child labor they use. Cut the tax breaks, make investing in actual "physical" businesses a priority for investors by taxing the hell out of the stock market, and make it law that all products made for U.s. consumption must be made in factories where all the employees make at least our federla minimum wage, and our problems go away. In addition, because it would cause the employees to be paid, not the government, there would be no stealing of 99% of the money like what happens in Somalia and Ethiopia.

  3. Capitalism took us as far as it could. Greed overcame flourishing as a nation, and now we are struggling. This has all been predicted in 1848. Maybe capitalism will have it's day in the sun again but not without a little help.

    Great response, Steven, but don't get upset if conservatives ignore your facts...nothing personal...I am not even quite sure they can help it.